It’s a technical malfunction

Paul Krugman launched out in his blog recently on yet another justification for the superiority of Keynesian economics (http://www.nybooks.com/articles/archives/2013/jun/06/how-case-austerity-has-crumbled/). He put it: “Keynesian economics rests fundamentally on the proposition that macroeconomics isn’t a morality play—that depressions are essentially a technical malfunction. As the Great Depression deepened, Keynes famously declared that “we have magneto trouble”—i.e., the economy’s troubles were like those of a car with a small but critical problem in its electrical system, and the job of the economist is to figure out how to repair that technical problem. Keynes’s masterwork, The General Theory of Employment, Interest and Money, is noteworthy—and revolutionary—for saying almost nothing about what happens in economic booms. Pre-Keynesian business cycle theorists loved to dwell on the lurid excesses that take place in good times, while having relatively little to say about exactly why these give rise to bad times or what you should do when they do. Keynes reversed this priority; almost all his focus was on how economies stay depressed, and what can be done to make them less depressed. “

Two things strike me here. First, for Krugman (and Keynes) recessions and even depressions are really a “technical malfunction’ in an otherwise perfectly functioning market economy. The job of economists is thus simple: “to figure out how to repair that technical problem”. And second, Krugman praises Keynes’ failure to explain what happens in booms. For me (and for Alan Freeman in a recent interesting piece, Freeman-Alan-What-causes-Booms) and of course, for Marx, what happens in booms explains why capitalism has slumps and what happens in them. Without an explanation of the laws of motion of capitalism in booms, we cannot understand the slumps – but apparently not for Keynes or Krugman.

But if Keynesian economics is so superior in its explanation of slumps under capitalism and what to do about them, why don’t governments listen and act accordingly instead of sticking to failing austerity measures? In another post on his blog, Krugman reckoned that it was the semi-Marxist, ‘post-Keynesian’ of the 1940s, Michal Kalecki who “had the answer. We are in a Keynesian crisis that calls for Keynesian policies; but conservatives find both the diagnosis and the cure anathema, for political reasons. Conceding that the government can and should create jobs would devalue the importance of being nice to businessmen, and suggest that in general the government can do good things. So the obvious diagnosis and response are unacceptable.” So the reason is that Keynesian economics is not adopted is because it threatens the perceived interests of the capitalist class and their irrational ideological conviction that government is bad and market is good. Indeed, the capitalists don’t recognise what is in their own interest.

Krugman’s adoption of Kalecki’s explanation for the failure of governments to solve depressions with Keynesian policies really stimulated Duncan Weldon, senior economist at the UK Trade Union Congress. In his blog (http://touchstoneblog.org.uk/2013/08/political-economy-trumps-macroeconomics), Weldon proclaimed that “Paul Krugman wrote one of the most significant blog posts on economics I’ve ever read[1]. Weldon referenced Krugman digging up Kalecki’s famous paper arguing this entitled Political Aspects of Full Employment. Quoting Kalecki, Krugman argued that captains of industry opposed solutions because such policies would undermine their political influence. “Hence budget deficits necessary to carry out government intervention must be regarded as perilous.” Weldon was very excited: “Essentially Krugman’s (and indeed Kalecki’s) point is this – we have the macroeconomic tools to restart a robust recovery and get unemployment down but these tools are not being used for political reasons.”

Weldon goes on to quote various leading Keynesian economists as they ponder the conundrum that the technical malfunction in the capitalist economy can easily be repaired but no government tries. Weldon quotes American Keynesian, Brad DeLong: “The working classes can vote, economists understand and publicly discuss nominal income determination, and no influential group stands to benefit from a deeper and more prolonged depression. But the monetarist-Keynesian post-WWII near-consensus, which played such a huge part in making the 60 years from 1945-2005 the most successful period for the global economy ever, may unravel nonetheless.” And then he quotes arch- Keynesian Briton, Simon Wren-Lewis who wails that “on the issue of the stupidity of pro-cyclical fiscal policy, it is only the views of politicians on the far-left or far-right that matches those of the majority of macroeconomists. Given the social, economic and political consequences of declining real wages and rising unemployment, which fiscal austerity only makes worse, this is both a very sad and rather dangerous state of affairs.” The leading economist of the British trade union movement, Weldon, concludes that “many of supposed macroeconomic problems are not intractable, the problem is as much one of political economy as of economics.”

But is it true that Keynesian policies can solve capitalist slumps and the only reason such policies are not adopted is because of ‘political reasons’? This is seems a thin reason. Capitalist strategists are not stupid. If they thought such policies would work to restore capitalist production, they would adopt them. The real reason they don’t is that the policies don’t work – at least not to restore the profitability of capitalist production, even if such policies can reduce unemployment for a while.

For Keynes, Kalecki, Krugman and Weldon, profit and where it comes from is irrelevant. Marx’s value theory, based on abstract labour and profit as the unpaid labour of the working-class, as Keynes put it (to his student Michael Straight): ”was even lower than social credit as an economic concept. It was complicated hocus-pocus.” [ Skidelsky, vol 2, p 523]. Keynes considered that Das Kapital was “an obsolete economic textbook which I know to be not only scientifically erroneous, but without interest or application to the modern world”. Marx’s ideas were “characterised… by mere logical fallacy” and was a “doctrine so illogical and dull”. Keynes did not need Marx’s value theory and law of profitability to explain capitalist crises. They were ‘technical malfunctions’ and were to be found in the financial sector of the economy, the ‘rentier’ part, in the distribution of value or income in an economy and not in any way in the productive sectors of the economy. There was nothing wrong with the capitalist mode of production as such. Indeed, capitalism would eventually deliver prosperity for all, more leisure and a better society. Keynes specifically argued for this capitalist future to his students at Cambridge at the height of the Great Depression in the early 1930s, as he was deeply worried that his students had become ‘infected’ with the dreaded and ridiculous ideas of Marxism (see my post https://thenextrecession.wordpress.com/2013/05/04/keynes-being-gay-and-caring-for-the-future-of-our-grandchildren/).

Keynes says the crisis comes about through a lack of ‘effective demand’, namely an unaccountable fall in investment and consumption and this causes profits and wages to fall. In contrast, Marx says: let’s start with profits. If profits fall, then capitalists would stop investing, lay off workers and wages would drop and consumption would fall. Then there would be a lack of effective demand, but this would not be due to a drop in ‘animal spirits’, or a ‘lack of confidence’ (we often hear that phrase from economists), or even too high interest rates, but because profits are down. The problem lies in the nature of capitalist production, not in the finance sector.

The Keynesian-Kalecki idea that profits depend on investment demand is back to front. For Marxists, it is the other way round: investment depends on profit – and profit depends on the exploitation of labour power and its appropriation by capital. Thus we have an objective causal analysis based on a specific form of class society, not on some mystical psychoanalysis of individual human behaviour among financial speculators (‘animal spirits’ or ‘confidence fairies’, https://thenextrecession.wordpress.com/2010/06/02/the-keynesian-answer-support-the-speculators/).

Now if investment in an economy depends on profits, and if profits are falling, then investment will fall. So capitalist investment (ie investment for a profit) will now depend on reducing the siphoning off of profits into capitalist consumption (dividends) and/or on restricting non-capitalist investment (government investment). So capitalism needs more government saving, not spending. The solution is the opposite of the Keynesian policy conclusion. Government spending will not boost profits, but the opposite – and profits are what matters under capitalism. So government spending is a negative for capitalist investment.

For that matter, contrary to some in the left of the labour movement who demand higher wages to boost demand and thus solve the crisis and invoke Keynes in support of such policy, Keynes himself was not on the side of the workers in a solution to a slump. Keynes commented on whether boosting wages would solve a slump: “In general, an increase in employment can only occur to the accompaniment of a decline in the rate of real wages.” So cutting real wages should be part of the solution to a slump even for Keynes. Indeed, real wages are falling in many capitalist economies at the moment.

So the austerity policies of most governments are not insane, as Keynesians think. These policies follow from the need to drive down costs, particularly wage costs, but also taxation and interest costs, and the need to weaken the labour movement so that profits can be raised. It is a perfectly rational policy from the point of view of capital, which is why Keynesian policies were never introduced to any degree in the 1930s. Capitalism came out of that Great Depression only when profitability rose and that was when the US went into a war economy mode, controlling wages and spending and driving up profits for arms manufacturers and others in the war effort. Capitalism needed war, not Keynes.

Marx’s analysis of booms and slumps is a much superior explanation than that of Keynes-Kalecki. Marx’s analysis shows that the capitalist system is not just suffering from a ‘technical malfunction’ in its financial sector but has inherent contradictions in the production sector, namely the barrier to growth caused by capital itself. What flows from this is that the capitalist system cannot be ‘repaired’ in order to achieve sustained economic growth without booms and slumps – it must be replaced. That is the ultimate policy action for the left.

I am now off to Madrid to debate just this issue with post-Keynesian radicals at the summer school of Spain’s Anti-Capitalist Initiative.

5 Responses to “It’s a technical malfunction”

Mike writes: “Keynesian policies were never introduced to any degree in the 1930s. Capitalism came out of that Great Depression only when profitability rose and that was when the US went into a war economy mode, controlling wages and spending and driving up profits for arms manufacturers and others in the war effort. Capitalism needed war, not Keynes.”

When most active and combative workers realize this, there will be a sea change in attitudes to government and politics as it is practised in Britain (and elsewhere) today. We can see capitalism failing all day every day, but so many false solutions are still being peddled even among the working class and in its own organizations. This misleading has to stop.

He adds: “Marx’s analysis of booms and slumps is a much superior explanation than that of Keynes-Kalecki. Marx’s analysis shows that the capitalist system is not just suffering from a ‘technical malfunction’ in its financial sector but has inherent contradictions in the production sector, namely the barrier to growth caused by capital itself. What flows from this is that the capitalist system cannot be ‘repaired’ in order to achieve sustained economic growth without booms and slumps – it must be replaced. That is the ultimate policy action for the left.”

Now we’re getting somewhere! A four sentence summary of the case for revolution – for replacing capitalist society with socialist society. And each sentence backed by a huge amount of hard scientific evidence and theory. Giving the workers this kind of correct, simple and effective knowledge is what theoretical work is all about.

And to top off an excellent post: “I am now off to Madrid to debate just this issue with post-Keynesian radicals at the summer school of Spain’s Anti-Capitalist Initiative.”

I see that Brad Delong on his Blog(30/7/13) has republished Joan Robinson’s ”Open Letter from a Keynesian to a Marxist”. This was aimed at Ronald Meek, who answered it in “Studies in the Labour Theory of Value.”
I recall visiting the birthplace of Adam Smith, where the natives do not affect the orotund pronunciation of Cambridge, but still bear on their tongues the accents of their Germanic roots. Entering a store where there was a sale, I overheard two women:
1st woman, ”Will ye jist nae look at the price o’ this, hen. It isnae wert the money.”
2nd woman, ”Ay, a ken. It jist isnae value for the price thur askin.”

At any moment I expected the indignant shade of the good Mrs. Robinson to jump out: No Hegelian metaphysics in Kirkcaldy, ladies.”
It is not so strange that Robinson claimed not to understand the concept of value so readily comprehended by these two worthy souls: it is really simply a matter of class outlook. Robinson’s dismissal of Marx won her the undying affection of Keynes, which perhaps was only of a sentimental value, but also the more solid value of a Cambridge professorship. A case in point is the historian E.H.Carr, who came from the same social class as Keynes. In 1934 he wrote a biography of Marx in which he denounced his ideas as those of a deranged fanatic. Later in life, and contrary to the usual pattern, he moved to the left to such a degree that he admitted that there was in Marx very little with which he could disagree. This led Carr’s writings to be denounced as the equivalent of holocaust denial.
So I wish Mike luck. It is after all a political task on which he is set. Perhaps Mike should begin by going on the attack and saying that he would hesitate to assert unequivocally that to advocate Keynesian economics is to be implicit in holocausts.
According to T. Pogge, a Professor of Philosophy at Yale, in ”Politics as Usual”(2010), ”Many more people-some 360 million- have died from hunger and remediable diseases in peacetime in the 20 years since the end of the Cold War……..roughly one third of all human deaths, 18 million, annually are due to poverty related causes, easily preventable.” I guess this makes Keynes’ assertion of the wellbeing of future generations under capitalism as the most falsified economic prediction of all time!
Oh and don’t let the Keynesians tell us about communist famines. Of course there have been such, but they have been blown out of all proportion by fascist propaganda. Cf.D. Tottle’s ”Fraud, Famine and Fascism:the Ukrainian Genocide Myth from Hitler to Harvard” (1987-can be read online). Even Robert Conquest , the British intelligence specialist who took over from Goebbels in the propagation of this propaganda, now accepts that the famine in the Ukraine was caused mainly by harvest failure and was not man-made! Same goes for ”Mao’s Great Famine” by Dikotter, a hireling at the son of Chiang-Kai-Shek’s think tank , whose photograph of a starving youth on the front cover was exposed as coming from the pre-revolutionary period. Dikotter apparently claimed there were none from the Mao era.(cf Patnaik, Monthly Review.org/2011/patnaik260611.)
It is the likes of Keynes, Robinson, Krugman and Delong who are the most dangerous enemies to Socialism. Meanwhile capitalism hastens humankind headlong towards a cataclysm!

Mike says that “if investment in an economy depends on profits, and if profits are falling, then investment will fall. So capitalist investment (..) will now depend on reducing the siphoning off of profits into capitalist consumption (dividends) and/or on restricting non-capitalist investment (government investment). So capitalism needs more government saving, not spending. The solution is the opposite of the Keynesian policy conclusion. Government spending will not boost profits, but the opposite – and profits are what matters under capitalism. So government spending is a negative for capitalist investment.”
I believe this requires to add some details. Since government production does not generally produce surplus value, it will not contribute to increase the social rate of profit and will not help to solve the main cause of the slump. However, for particular firms, say construction companies building bridges or manufacturing ones producing aircraft carriers, government spending will generate accounting profits and in that sense it will contribute to “solve” the slump as far as that production is not financed by present surplus value (the alternative is to finance it through debt or through payroll or consumption taxes which to a large extent represent wage cuts).
Good luck in Spain!